IMPORTANT HINTS/NOTES PROCESS COSTING - A method of costing, to find out cost of each process/operation : where many processes are

involved , for one product , which are continuous & repetitive. - A form of operation costing, where products are standardised & Cost unit/centre is the process. - A period costing/average costing/historical costing, not specific costing. Normal loss/waste/wastage or standard/expected loss = Unavoidable, = Input x % of normal loss, or (Input - Normal output). It may be given in No. or %. of input. Treatment: Cost of Normal loss is absorbed by good units; Sale value is credited to Process A/c and debited to Normal Loss A/c. The sale proceeds (cash) is credited to Normal Loss A/c. In case of abnormal gain, the part of sale value of normal loss debited to Normal Loss A/c but not incurred is credited to Normal Loss A/c and debited to Abnormal Gain A/c.. Abnormal loss/waste, Avoidable loss = (Normal output Actual output), or (Actual loss Normal loss). Generally, this quantity is to be calculated from the given information such as input, normal loss, scrap and output. Its cost is calculated at unit cost of Normal cost. Treatment: The cost of Abnormal loss is credited to Process A/c and debited to Abnormal Loss A/c. Sale proceeds of abnormal loss (cash) is credited to Abnormal Loss A/c. The balance in Abnormal Loss A/c is transferred to Costing P/L account. Abnormal gain/effective/efficiency = Normal loss less than actual loss, (Actual output - Normal output), It is a saving or reduction in Normal Loss. Generally, this quantity is to be calculated from the given information such as input, normal loss, scrap and output. Its cost is calculated at unit cost of Normal cost.

Treatment: The cost of Abnormal gain is debited to Process A/c and credited to Abnormal Gain A/c. The part of sale value of normal loss debited to Normal Loss A/c but not incurred is credited to Normal Loss A/c and debited to Abnormal Gain A/c. The balance in Abnormal Gain A/c is transferred to Costing P/L account.

Actual output = (Gross Input Actual loss), Normal output/Standard output = (Input Normal loss), Normal cost = (Gross Input cost sale value of normal loss) Transfer cost = (Unit cost Unit cost = Normal cost actual output) Normal output.

Scrap= discarded material. (Normal/Abnormal) Treated as abnormal if identifiable & large. Spoilage= production not upto mark that cannot be rectified. (Abnormal) Salvage= production that can be rectified. (Normal/Abnormal) Accounts to be opened : Process a/cs, Normal loss a/c, Abnormal loss a/c, Abnormal gain a/c,

INTER-PROCESS PROFIT

- Profit charged by one department or process on the cost of its output transferred to next department or process, normally as a percentage on the total cost or prime cost incurred in the department or process. - Objective: To test the efficiency of department or process in the line of SBUs in terms of the market status of similar activity. Treatments in problems:Prime cost = Value of Opening stock + Direct material + Direct labour + Direct expenses Closing stock. Profit element in closing stock = Amount in profit column column Value of closing stock. 100 Cost Cost Amount in Total

Profit (if % on cost price) = % of profit Profit (if % on transfer price) = % of profit

(100 Profit %)

In case opening stock with profit, generally profit element is given in amount. If the amount or % is not given, apply the same % of profit in transfer to next process. EQUIVALENT PRODUCTION / QUANTITY Equivalent Quantity is the quantity of incomplete or partly completed units of opening or closing WIP converted as of completed units. It may be calculated in respect of any element of cost for the purpose of calculation of cost of incomplete units accurately. Methods applied: 1. Average method, 2. FIFO method. 1. In case of Average method: The cost of opening WIP is added to the cost of current period as if the former is incurred in the current period. The incomplete opening stock is not considered in the statement of equivalent production. The cost of closing WIP is calculated on the average costs of opening WIP and current expenditure.

2. In case of FIFO method: The incomplete opening WIP is considered in equivalent production separately. The cost of opening WIP already incurred is not added to current cost while calculating the cost of closing WIP or Eq. Production. When units are received from previous processes, and also materials are added/purchased in the process, and if opening WIP is incomplete by material, the treatment will be as follows: 1. Units/ received from previous process is Material I and Material added in the process is Material II. 2. The incomplete portion of material in opening WIP is to be assumed as in respect of material II only. 3. For valuation of closing WIP, the incompletion % will be in respect of both the materials and treated accordingly unless otherwise specified.

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